Are Stock Markets Waking up to Reality?
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British consumers are running out of credit. Stock markets took a serious hammering yesterday. The FTSE 100 lost nearly 150 points to close at 5,518. Over in the US, the Dow Jones dived by more than 350 points, to close at 11,453. This morning, the Asian markets followed suit, with the Nikkei 225 sliding nearly 300 points to 13,544 points.
What was behind the mass sell-off? Well, two big factors were oil prices hitting a record, and fresh fear stalking the banking sector. Oh, and Goldman Sachs (GS) reckons that General Motors (GM) is a ‘sell’.
So business as usual, then…
Stock markets around the world dived yesterday, taking a lead from the US. The Dow Jones hasn’t seen a June this bad since the Depression, according to Marketwatch. The US blue-chip index is down nearly 1,200 points this month, or 9.4%. In June 1930, it fell 17.7%. The Dow also broke its March low of 11,731, which occurred amid the Bear Stearns (BSC) Bust.
So what was so bad about yesterday? Well, oil hit a fresh record for a start, jumping above $140 a barrel to a high of $140.39. That’s partly because of comments from Opec president Chakib Khelil that the price could go as high as $170 a barrel this summer. But it probably had more to do with the dollar weakening, because people aren’t stupid enough to believe that Federal Reserve chief Ben Bernanke actually gives a damn about a ‘strong dollar’ (for more on this, see yesterday’s Money Morning: Buy gold now – before they ban it).
The reality is that the Opec prediction wasn’t that scary by today’s standards. Despite his headline-grabbing prediction, Mr Khelil went on to point out that he didn’t think oil would hit $200 a barrel as predicted by Goldman Sachs, and would in fact “probably fall a bit towards the end of the year.” He did throw in the traditional caveat, aimed no doubt at the US, about how prices would of course shoot up if there was a halt to production in Iran, but that’s nothing we didn’t know.
But it seems that people are starting to realise that high crude oil prices are actually a problem for the economy. “One thing is for certain, if crude continues to rally, stocks are dead,” is what Dale Doelling of Trends in Commodities told Marketwatch. Mr Doelling reckons that if stocks pull a similar performance today, “then the fallout next week could include government intervention in the markets.”
Now to be fair, a similarly bad day looks unlikely, simply because after big falls like this you get all the ‘bargain’ hunters piling in. If you don’t, that’s when you realise that we really have hit capitulation point.
Anyway, with oil prices soaring, it’s perhaps no surprise that Goldman Sachs reckons that General Motors is in trouble. The investment bank warned investors to dump the stock, lowering its price target to $11 a share from $19 a share. To be honest, Goldman was a bit behind the curve on this one – the share price was less than $13 at the start of trading yesterday. But the note certainly seemed to do the trick – the stock fell nearly 11% by the end of the session.
Goldman reckons the iconic motor group will need to raise more money, by issuing more shares, or cutting its dividend. Again, no big surprise. GM is on the wrong side of the environmental debate – and more importantly, on the wrong side of high fuel prices. Consumers can’t afford new cars, and even if they can, they are buying smaller, more fuel-efficient ones.
It wasn’t just GM. Goldman’s analysts had the scent of blood in their nostrils. Another warned that Citigroup was going to face more writedowns for the quarter just past, a full $8.9bn. That hurt the banking sector.
But the truth is that there wasn’t any real reason for stocks to take fright yesterday rather than the day or the week or the month before. The idea that car companies might suffer when oil prices are at record levels isn’t exactly a contrarian insight. And the idea that banks might run into more trouble isn’t a big surprise either, given that we’re just at the start of what looks like a recession in the US, and of course in the UK.
And over here in Britain, we are in a worse position than most. Our consumers are the most over-indebted, and they’re running out of ways to fund their spending. The Times reported yesterday that the number of pay-day loans being taken out is rising – that is, borrowing money to tide you over from one wage packet to the next, which of course, is a recipe for sliding into a black hole of never-ending debt.
It’s hard not to see this continuing. In fact, in the latest issue of MoneyWeek, out today, my colleague David Stevenson has a look at just how long the bear market could last.
Source: Are stock markets waking up to reality?
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Tags: Bear Sterns, BSC, Gm, GS, John StepekAbout the Author
John Stepek is Deputy Editor of the UK-based financial weekly MoneyWeek. He is also the editor of daily investment email Money Morning UK. John graduated from Strathclyde University in 1996. He has worked for a number of financial magazines and newsletters including Families in Business, Shares Magazine and The Sunday Times.